I stand corrected. Prof Om Prakash Mathur of the National Institute of Public Finance and Policy informs me that it is not some states, as I said in my last column, but all states who have established state finance commissions (SFCs). He adds that the Delhi SFC is not the first to submit its report, as many as 10 SFCs have submitted their reports (alth-ough only four of these have been laid on the table of their respective legislatures); in fact, the Delhi SFC has submitted only an interim report. I am delighted to be corrected, not only because such detail is important in itself but more because it shows that the 73rd and 74th Constitution amendments have acquired a dynamic of their own.
With that, however, the good news comes to an end, because, I am further informed by Prof Mathur that West Bengal is the only state to have endorsed virtually every recommendation of the SFC. All other states are engaged in watering down SFC recommendations by one device or the other.
I shall come to the path-breaking West Bengal example in a subsequent column. Today, I wish to limit myself to some important issues relating to the sound finances of the panchayats and nagarpalikas which, in my view, deserve wider consideration. First, on what basis in reason and practicality, are SFCs to base their recommendations? Anticipating this question, the amendments have provided, in the 11th or 12th Schedules, a constitutional basis for the division of responsibilities bet-ween state governments and local bodies. While these Sch-edules have only an exemplary, not a binding force, every single state legislature has accepted provisions of the two Schedules in toto and some have been added to it. In the case of more progressive states like Karnataka, the legislature has gone even further specifying in the law what will be the specific jurisdiction of each tier of the panchayati raj system in respect of the devolved subjects.
Since the key question in the allocation of financial resources to local bodies is the provision of the wherewithal, it is the two Schedules that should constitute the starting point of their deliberations for the SFCs. This would then have to be filled out with reference to the details of devolution in the state legislation, rules or administrative orders issued to implement the legislation, and practice on the ground. The next step, of course, would be to see whether devolution has, in fact, taken place in accordance with the letter and spirit of the law. Where devolution is found to be inadequate, partial or wanting, it would be incumbent on SFCs to bring the material facts to the attention of governments, legislatures, and the elected representatives in local bodies. These are the basic desiderata that, one hopes, the SFCs will take into account in determining the financial needs of local bodies.
Having determined in this manner the quantum of resources (at least as a ball park figure) that the local bodies will require, the next step would be to establish the sources from which funds might come, and the ratio in which these sources might be tapped. This, of course, is nothing new and that is precisely where the trouble lies. Over the years, fiscal conventions have been established whereby the proceeds of some types of taxes are assigned to the local bodies (particularly the nagarpalikas) and revenues from other types of taxes reserved for the use of the states. What has happened in practice is that taxes with the least buoyancy have come to be treated as the local bodies domain, with higher buoyancy ones being appropriated by the state. What appears to be more important than determining which tax will fall in the domain of which authority, SFCs should really be rethinking the whole issue in terms of the quantum of resources required to fulfill devolved tasks, and the proportion of such expenditure which should be met from tax revenues. SFCs need to get out of the groove of academic exercises about which tax should be regarded as the captive revenue source for the local body and which for the state. I get the impression from the literature made available to me by Prof Mathur that SFCs (and their advisers) are going round their traditional grooves (property taxes to municipalities; sales tax to the state) and not bringing a sufficiently uncluttered mindset to the determination of these technical fiscal issues.
There also seems to be no attention paid to what, in my view, constitutes the single most important fiscal provision of the Constitution amendments, namely, the provision for local bodies to appropriate revenues for their own purposes. As we were taught in Class I of our public finance courses at college, the revenues of the state are credited to the Consolidated Fund and expenditure is then authorised therefrom. The act of revenue raising is thus divorced from the purposes for which the revenues raised are spent. In local government, the closer the nexus between the purpose for which revenue is raised and the purpose for which it is spent, the better the prospects of compliance. This is possible through the appropriation mechanism. SFCs should, in my view, give this mechanism the attention in detail it deserves.
My own favourite illustration of this proposition is that if a village panchayat were to levy a poll tax on cattle saying the proceeds would be used to employ a veterinary doctor, the biggest beneficiary would be the largest owner of cattle; the revenues raised might then prove adequate to not just employ a vet but put up a vet dispensary. If on the other hand, a panchayat were to impose a poll tax on cattle without specifying what would be done with the funds so raised, every cattle owner would become a cattle rustler, shooing them out of sight.
Finally, it is crucial that the 11th Finance Commission, due to be set up later this year, has one member exclusively charged with looking after the constitutional obligation to ensure the sound finances of local bodies. This will require the closest liaison and co-ordination between the Finance Commission and the SFCs. If Mr Gujral does just this one thing, his prime ministership will become immortal however long or short its duration.
